Fitch Expects to Rate Blackstone's Unsecured Notes 'A+'

OREANDA-NEWS. Fitch Ratings expects to assign a rating of 'A+' to the new unsecured notes of Blackstone Holdings Finance Co. L. L.C.'s, a subsidiary of The Blackstone Group L. P. (Blackstone).

Fitch views this debt issuance as opportunistic, as interest rates remain relatively low on a global basis. Debt issuance proceeds are expected to be used for general corporate purposes and for the pre-funding of 2019 debt maturities, which amount to $585 million. Blackstone was in a negative net debt position at June 30, 2016 and is expected to remain so, with debt proceeds invested in the firm's treasury cash management strategies.

KEY RATING DRIVERS

SENIOR DEBT

The expected rating is equalized with the ratings assigned to Blackstone's existing senior unsecured debt as the new notes will rank equally in the capital structure. At June 30, 2016, Blackstone's funding was fully unsecured.

While gross leverage levels are expected to increase following the opportunistic issuance, Fitch believes the firm will remain in a negative net debt position. Fitch continues to view the firm's ability to access the public bond market and extend its debt maturity favorably, as it provides Blackstone with enhanced funding flexibility.

Blackstone's leverage, as measured by corporate debt divided by fee-related EBITDA (FEBITDA), was 2.56 times (x) at June 30, 2016 on a trailing 12 month (TTM) basis, compared to Fitch's quantitative benchmark range for 'A' rated alternative IMs of 0.5x-2.5x. Still, this ratio recovered more quickly than Fitch expected following the spin-off of the financial advisory business, given strong FEBITDA growth in most segments. The pending issuance will result in an up-tick in Blackstone's leverage, on a gross basis, but leverage is expected to decline over time with growth in FEBITDA. The expiration of the fee holiday on Blackstone Capital Partners VII in November 2016, in particular, is expected to add about $200 million in annual run-rate revenue for the firm. Net leverage, adjusting for the whole or partial refinancing of 2019 debt maturities, is not expected to change. Blackstone expects to manage net leverage at-or-below 2.5x over the long-term.

Rating constraints for the alternative IM space include 'key man' risk, which is institutionalized throughout many limited partnership agreements, reputational risk, which can impact the company's ability to raise future funds, and legal and regulatory risk, which could alter the alternative asset space. Rating constraints more specific to Blackstone include an above average payout ratio and modestly reduced revenue diversity following the spin-off of the firm's advisory, restructuring, and fund placement businesses on Oct. 1, 2015. Over a longer-term horizon, Fitch will also monitor the potential for overall size to constrain the ability to meet or exceed historical returns.

Blackstone's Stable Rating Outlook reflects Fitch's expectations that management will continue to generate stable management fees, maintain strong operating margins, grow/retain FAUM through the raising of new and expansion of existing funds, albeit at a more moderate pace, reduce leverage, increase interest coverage and retain a solid liquidity profile in order to fund operations and meet co-investment commitments to the funds.

RATING SENSITIVITIES

SENIOR DEBT

The senior debt rating is primarily linked to changes in Blackstone's Long-Term Issuer Default Rating (IDR) but is also sensitive to changes in recovery prospects for the debt class.

Positive rating momentum for Blackstone's IDR is considered relatively limited, given the nature of the business and the company's existing risk profile. However, positive momentum could develop over time with a meaningful reduction in key man risk, enhanced stability of incentive income through a variety of market cycles, and declines in leverage.

Negative rating actions for Blackstone's IDR could be driven by material changes in operating strategy or leverage tolerance resulting from changes in senior management or declines in investment performance which adversely impact the business franchise, meaningful FAUM and margin contraction which impairs FEBITDA, reduced product line diversity, and/or impairment of the liquidity profile as it relates to operating needs, debt maturities, and co-investment commitments. An inability to maintain leverage below 2.5x and improve interest coverage above 8.0x, over the long-term, could all yield negative rating pressure.

Blackstone, a Delaware incorporated limited partnership, is a leading global alternative IM specializing in private equity, real estate, credit funds, and hedge fund solutions. As of June 30, 2016 FAUM amounted to $266 billion and total AUM was $356.3 billion. The company's stock is listed on the NYSE under the ticker 'BX'.